Most Borrowers Default on Revolving Accounts Before Mortgage

February 8, 2011 No Comments »

first

A new study from credit bureau Equifax claims most borrowers default on a revolving account, such as a credit card or HELOC, before defaulting on their mortgage.

The company analyzed consumer credit trends using a new metric called “default distance,” which is the number of months between the revolving debt default and the first occurrence of foreclosure.

Analysis by Equifax found that revolving account defaults continue to occur before first mortgage loan defaults, with the timespan between the two decreasing over time.

The most substantial decrease in default distance was on high loan-to-value ratio mortgages, like option arms, meaning strategic default is coming into play.

And default distance is shortest in hard-hit states like Florida, California and Michigan, while longest in healthy states such as Texas and South Dakota.

The report also noted that in late 2008 and early 2009, borrowers in the two highest VantageScore bands (Equifax’s proprietary credit score) had the lowest average distance between revolving and mortgage defaults.

Equifax attributed this to the fact that borrowers in these high credit score bands consistently pay nearly all of their credit obligations on time, but once they default on one account, many of them default on multiple other accounts concurrently.

“Having the ability to accurately measure default behavior is critical for investors looking for better ways to assess mortgages that on the surface appear healthy,” said Afshin Goodarzi, Equifax Capital Markets, in a release.

“Our analysis underscores the importance of evaluating payment hierarchy and its relationship to loan performance- especially among more creditworthy borrowers.”

Leave A Response